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January 19, 2013

ISLAMABAD: The International Monetary Fund expressed concern over Pakistan's falling exchange reserves on Friday, but stopped short of echoing analysts' warnings that it could face a new balance of payments crisis within months without a new loan package.

"There is still a balance of payments concern … the foreign exchange reserves in the central bank have declined," Jeffrey Franks, the regional adviser to the Fund on Pakistan told a news conference. "Foreign direct investment has fallen sharply but other capital inflows are also very weak."

Franks said that Pakistan has not sought a new loan programme. However, if it did, it would have to implement strict measures for achieving economic targets needed to qualify for a new IMF programme, DawnNews reported.

Pakistan's state bank currently has about $9 billion, enough to cover about two months' worth of imports, if cash deposits in private dollar accounts are not counted, Franks said.

In 2008, the country averted a balance of payments crisis by securing an $11 billion IMF loan package. The IMF suspended the programme in 2011 after economic and reform targets were missed. Some analysts have since warned about the prospect of a new balance of payments crisis. Pakistan owes the IMF just over $6.2 billion. It is due to repay $1.6 billion in the first six months of 2013, Franks said, a schedule that will strain reserves and may accelerate the slide of the rupee currency. The rupee currently stands at 98.6 to the dollar, a depreciation of about 8 per cent over the course of 2012.

"Those reserves are not yet at a critical level but it's important to address the policy – the underlying policy issue well before you get to the point where they become critical," said Franks.

But the current government has failed to enact the reforms needed to boost reserves and qualify for a new IMF programme.

Broaden tax base, slash subsidies

The Fund wants Pakistan to broaden its narrow tax base and slash subsidies it says mainly benefit the wealthy.

Franks said further funding was contingent on a consensus being reached by political parties on comprehensive, permanent financial reforms and firm implementation of them.

Analysts think the IMF is unlikely to cut a deal soon as the government will probably lack the political will to take bold measures ahead of elections due this spring.

"The earliest the IMF can step in is in June," said Sakib Sherani, a former finance ministry official who now heads the Macro Economic Insights research institute. "It's a matter of a few months before there is a crisis."

Mohammad Khan, a former commerce minister, said the looming election virtually ruled out any deal soon with the Fund.

"This is a government that has been irresponsible for five years, and now they are going to spend extravagantly to win these elections," he said.

Most Pakistanis are already angry over the handling of the economy. Demonstrators cited a lack of jobs, high food prices and power cuts in mass protests this week led by cleric Tahirul Qadri demanding the government's resignation.

The IMF predicts growth will touch 3.5 per cent in the fiscal year beginning in July against last year's figure of 3.7 per cent and slow to three per cent the following year – less than half the rate needed to absorb the population entering the workforce.

Growth is hindered by chronic power cuts that have hurt key industries like textiles. Mismanagement of the power sector costs an estimated $1.5 billion ever year, according to the Pakistan Planning Commission.

The IMF estimates that inflation for this fiscal year will reach around 9.5 per cent against 10.8 per cent last year, Franks said. Wages have not kept up, causing widespread anger. Franks said the Fund wanted Pakistan to reduce its fiscal deficit – which could exceed seven per cent this year – by closing tax loopholes and cutting expenditure like energy subsidies.

"It's not just the lack of energy, it's the unreliability, the unpredictability," said Franks. "That's what's holding your growth back more than any other thing."

IMF rules out writing off or restructuring heavily in debt Pakistan's loans

By ANI |

Islamabad, Jan. 19 (ANI): The International Monetory Fund (IMF) cannot write off or restructure Pakistan's loan, the head of the organization has said.

While speaking to the media, Jeffrey Frank further said that Pakistan has not formally sought a new program.

He added that that if they did want to seek a new program then their economic strategy must radically change as losses of government institutions had drowned the current economic strategy, the News International reports.

Frank said that Pakistan was in need of billions of dollars in revenue in expenditure as it was suffering from a current deficit of 16.24 trillion, adding that Pakistan's foreign exchange reserves had diminished.

The IMF mission chief also said that taxation on agriculture, retail and sales should be made more effective and tax relaxations and concessions should be done away with, the report said.

He further said that Pakistan's major issue is power deficiency and power theft was behind the increasing deficit, it added. (ANI)

The International Monetary Fund (IMF) may sign a loan programme with the caretaker government if all major political parties agree on a broader set of action plans. However, before that is possible, Pakistan will have to take some tough prior actions, says the Fund's representative for the region.

In a luncheon meeting with a group of journalists here on Friday, Jeffrey Franks, adviser to the IMF for the Middle East and Central Asia, spoke at length on the grave economic situation the country is faced with. He also shed light on the Fund's ongoing dialogue with the government, aimed at building consensus on a set of conditions needed to be fulfilled before and during the course of a fresh bailout programme. Franks was accompanied by the new IMF Country Representative Mansoor Dailami.

"The current polices will have to be readjusted in order [for Pakistan to become eligible] for an IMF programme. The IMF has discussed with the government what kind of policies would be necessary," said Franks.

The IMF's prescription to Pakistan includes a healthy measure of – not surprisingly – increasing taxes, cutting expenditures, withdrawing electricity subsidies and increasing interest rates to check inflation, which is expected to rebound soon and devalue the currency further.

"We have agreed with the government that the deficit eventually needs to come down to 3-3.5% of the GDP in three years, from the current level of over 7%," revealed Franks. "According to our one-month assessment, Pakistan's currency is overvalued by 5-10%. Modest depreciation might yield positive results for the economy," he added. "The monetary policy also needs to be calibrated to bring down inflation to between 5-7%."

He underscored the need for having "broadest and deepest possible political support for any new programme". Franks also sought support at the highest levels, besides taking provinces on board, before the government enters into a formal arrangement with the Fund. He said that if political parties agree on a broader reforms agenda, the IMF can be flexible on how Pakistan goes about achieving it.

"The decision whether or not we will enter into a programme with the interim government will be made by the IMF management: however, if there is very strong and broad political support, going beyond the interim government, it might be possible," Franks said, while responding to a question asking about the timing of the programme.

The IMF official observed that Pakistan's problems require long-term solutions, and that any new programme will not last less than three years.

Franks disclosed that, according to the IMF assessment, this year's budget deficit will remain around 7-7.5% of the GDP. In absolute terms, the IMF projects a Rs1.624 trillion deficit – a whopping Rs516 billion or 2.3% higher than government estimates. Besides the significant shortfall in revenues, Pakistan also may not be able to complete the auction of the 3G telecom spectrum, causing another shortfall of around Rs75 billion.

To add icing to that unsavoury cake, the economy will grow just 3.5% this year according to the IMF's estimates, as against official projections of 4.3%.

"The number one bottleneck to growth is the energy sector. The number two bottleneck is the energy sector, and the number three bottleneck is also probably the energy sector," said Franks.

"Private sector credit growth is very weak; large scale manufacturing is positive, but very low; and we don't see robust export growth," observed Franks. He further said that while declining inflation is a good indicator, it is also worrisome because domestic demand continues to remain weak. He also criticised the government's tax collection efforts, which he said are indicative of weaknesses in the economy.

Even though the IMF has projected a current account deficit of a low 0.7% of GDP, Franks warned that even this low level is dangerous due to drying foreign inflows. As a final blow, he also ruled out any restructuring of IMF loans.

He agreed that tough actions may cause a temporary drop in growth, but insisted that they were necessary for achieving macroeconomic stability.

Franks also hinted that the central bank should be made an independent part of plans for the new programme.

Published in The Express Tribune, January 19th, 2013.

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